Manatt on Medicaid: Supporting Medicaid Delivery System Transformation through Federal Waivers

Manatt, Phelps & Phillips, LLP

States have long relied on Section 1115 Medicaid waivers to advance payment and delivery reforms in their Medicaid programs, including far-reaching managed care programs and innovative provider-led care management initiatives. Increasingly, states are looking to couple transformational payment and delivery reforms with new funding support through Delivery System Reform Incentive Payment (DSRIP) programs whereby the state receives federal financing for projects designed to improve access, quality and efficiency in the healthcare delivery system.

To obtain DSRIP funding, states must design and providers must implement projects that advance the “Triple Aim” of improving the health of the population, enhancing the experience and outcomes of the patient and reducing the per capita cost of care. Eligible providers are required to submit a plan detailing the reform activities they will undertake, and projects must meet specific milestones as a condition of receiving DSRIP funding. The mix of incentives and accountability measures is intended to spur change with lasting benefits for patients, providers, states, and the federal government.

To date, six states—California, Texas, New Jersey, Kansas, New York and Massachusetts1—have received Centers for Medicare and Medicaid Services (CMS) approval for DSRIP programs as part of 1115 waivers to advance payment and delivery system reform. Several other states are considering DSRIP programs, including Alabama, whose proposed 1115 waiver incorporates both provider-led managed care reform and a DSRIP initiative.

Operationalizing a DSRIP Program

The elements of state DSRIP programs vary, reflecting both the unique characteristics of each state’s Medicaid program and the evolving federal requirements which have become increasingly prescriptive since the first program was launched in 2010. In all cases, the state’s overarching goal is transformation of the Medicaid payment and delivery system. Among the criteria states must consider include:

  • Goals and Objectives: States must evaluate their existing Medicaid programs and identify specific goals and measureable outcomes that reduce costs, increase efficiency and improve quality of care. CMS and states use these goals and metrics to assess whether providers meet, exceed or fall short of the necessary milestones. Providers only receive funding if they meet the measures approved in the DSRIP project plan.
  • Eligible Providers: States must determine which providers are eligible to receive DSRIP funds. In some states, only public hospitals are eligible entities, while in others “safety net providers” (including nonpublic hospitals and other categories of providers) are eligible through a collaborative provider network or through affiliation with an anchor public hospital.
  • Funding Allocation: States must describe the methodology for allocating the DSRIP funding. Past DSRIP waivers have prioritized certain types of projects (e.g., integrated healthcare delivery, expanded primary care capacity, and/or population-focused improvements), as well as certain provider types (e.g., those with the largest percentages of Medicaid and uninsured patients).
  • Data Collection and Evaluation: Providers have varying data collection and reporting systems which may present a challenge for project evaluation. States must establish data collection and reporting requirements that adequately measure provider performance against approved process and outcome metrics to determine whether participating providers have achieved the necessary milestones to receive DSRIP funds.

Funding a DSRIP Program

To receive federal funding for the DSRIP program, states must identify a source of state dollars that can be used to “match” federal funding. For 1115 waivers, states have generally relied on Designated State Health Programs (DSHPs), which are state-only investments for programs that “look like” Medicaid services but are not currently federally matched (e.g., behavioral health services for low income adults not eligible for Medicaid). Through the waiver, CMS provides federal matching funds for these programs. The federal matching dollars are then used to fund the DSRIP program. States also use general fund dollars to support the program.

California, Texas and New York have leveraged intergovernmental transfers (IGTs) from public hospitals and their sponsoring government entities to fund their respective DSRIP programs. The public hospitals transfer local dollars to the state. The state then draws down federal funds to disburse to providers through the DSRIP program projects. IGTs are an alternative source to DSHPs or general fund dollars and are particularly helpful for those states with limited DSHPs. CMS has approved 1115 waivers using IGTs since public hospitals are typically the beneficiary of the DSRIP investments and lead the delivery system reforms in states.

New York’s DSRIP Program

As part of New York’s ongoing Medicaid redesign, on April 14, 2014, the State received approval to amend its existing 1115 Partnership Plan waiver (New York’s Medicaid managed care waiver) to begin implementing a DSRIP program for hospitals and other safety-net providers. New York expects to draw down $6.42 billion in federal funding to support delivery system reforms through the DSRIP pool, the non-federal share of which will be financed primarily through IGTs from public hospitals. Projects funded through DSRIP are intended to transform the safety net system, reduce avoidable hospital use by 25%, and create a sustainable delivery system through managed care payment reform. New York expects to leverage its Medicaid managed care infrastructure to support DSRIP projects and to enable value-based payments between plans and providers.

Stand-alone providers are not eligible to apply for funds independently. Eligible providers must form “Performing Provider Systems” (PPS), coalitions comprised of a lead provider and component providers, which must participate in programs across three domains that focus on broad system transformation and collaboration. To participate in a PPS, a provider must be either a public hospital or a nonpublic safety net hospital that meets minimum Medicaid, dually eligible and uninsured population thresholds or serves over 30% of the Medicaid beneficiaries in a region. “Non-hospital” providers are eligible to participate in a PPS but must meet a minimum Medicaid volume threshold as well. Finally, providers that would not otherwise qualify can petition the State and CMS to be deemed PPS-eligible if they meet certain “vital access” needs in a community. Non-qualifying providers may participate in a PPS but may only receive up to 5% of a project’s total funding.

DSRIP dollars will be allocated across two pools—one for public hospital-led PPS projects and one for all other provider-led PPS projects. The methodology for allocation between these two pools has not yet been finalized and will likely be cause for much debate in the coming months. Understandably, public hospitals expect that they will receive a return on the value of their IGT investment. Upon approval of a preliminary reform plan, each PPS will receive a design grant to fund the development of the final DSRIP project plan with associated milestones and metrics. A maximum project value is calculated, which represents the highest possible DSRIP allocation a PPS can receive for the project if all process and outcome metrics are achieved. The PPS is at risk of losing some DSRIP funding if those targets are not met.

In addition to the rigorous allocation requirements, the New York DSRIP program includes several elements that are not part of other state DSRIP programs, reflecting lessons learned from earlier DSRIP waivers. New features in New York’s program include:

  • High Performance Fund: New York will create a performance pool available to providers that exceed the stated quality improvement goals.
  • Statewide Accountability: In addition to the metrics and milestones applicable to each PPS project, New York must meet statewide performance goals and targets to obtain full DSRIP funding. Failure to achieve these goals and targets will result in the withholding of some DSRIP funds beginning in year three of the demonstration.
  • Interim Access Assurance Fund (IAAF): New York created a new pool ($500 million) to support safety-net providers that serve significant numbers of Medicaid beneficiaries and demonstrate financial hardship through losses or low margins. The IAAF is intended to ensure that Medicaid beneficiaries have adequate access to care in these affected facilities until December 31, 2014, when DSRIP projects are expected to launch.


DSRIP waivers can provide states and providers with considerable federal funding to transform the delivery system on which Medicaid patients rely. To ensure that the federal investment results in meaningful and sustainable improvements in access, quality and efficiency, CMS has become more prescriptive about DSRIP program requirements. Accordingly, states must devote significant time and resources to develop and implement the DSRIP proposal, and providers must meet stringent requirements to receive funding. As the program continues to evolve, it will be important to monitor states’ and providers’ appetite for the funding risk associated with these programs, and most significantly whether DSRIP programs will result in lasting improvements in quality and reductions in Medicaid spending.

Manatt on Medicaid is produced by Manatt Health, the healthcare division of Manatt, Phelps & Phillips, LLP. Manatt Health is a fully integrated, multidisciplinary legal, regulatory, advocacy and strategic business advisory healthcare practice. Manatt Health’s extensive experience spans the major issues re-inventing healthcare, including Medicaid redesign and innovation; payment and delivery system transformation; health IT strategy; health reform implementation; healthcare mergers and acquisitions; regulatory compliance; privacy and security; corporate governance and restructuring; pharmaceutical market access, coverage and reimbursement; and game-changing litigation shaping emerging law. With 60 professionals dedicated to healthcare—including attorneys, consultants, analysts and policy advisors—Manatt Health has offices on both coasts and projects in more than 20 states.

1. The Massachusetts program is slightly different than other DSRIP programs. Massachusetts has been operating a Section 1115 demonstration waiver since 1997. A principal policy objective of the waiver was to shift government subsidies away from direct payments to healthcare providers for delivering care to the uninsured, towards subsidizing the purchase of health insurance coverage for the low-income uninsured as part of the state’s universal coverage initiative. To facilitate this transition, a waiver extension in 2005 created a new Safety Net Care Pool (SNCP). As part of its most recent waiver renewal, Massachusetts is creating a Delivery System Transformation Initiative (DSTI) funded through the SNCP. DSTI initiatives, similar to DSRIP programs, are aimed at helping safety net hospitals transition to value-based purchasing.

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Manatt, Phelps & Phillips, LLP

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